What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-08 · 142 added, 147 removed, 201 unchanged (59% of the section changed)

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSI S OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion under this Item 2 in conjunction with our consolidated financial statements and related notes and information included elsewhere in this quarterly report on Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 6, 2020.

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Other auxiliary operations

For the three months ended March 31, 2020 and 2019, revenues from insurance operations before intracompany elimination represented 94.2% and 94.5%, respectively, of total revenues of all operating segments.

At March 31, 2020 and December 31, 2019, insurance operations’ total assets represented 85.4% and 85.5%, respectively, of the combined assets of all operating segments.

For the three months ended June 30 , 20 20 and 201 9 , revenues from insurance operations before intracompany elimination represented 96.2 % and 95.2 %, respectively, of total revenues of all operating segments.

For the six months ended June 30, 20 20 and 201 9 , revenues from insurance operations before intracompany elimination represented 95.5 % and 94.9 %, respectively, of total revenues of all operating segments.

At June 30 , 20 20 and December 31, 201 9 , insurance operations’ total assets represented 85.9 % and 85.

5 %, respectively, of the combined assets of all operating segments.

See Note 1 5 - - “Segment Information” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

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Currently, Florida is our primary market.

TypTap has been the primary source of our growth in gross written premium since 2018.

TypTap’s policies in force have increased from 6,721 in January 2018 to 29,861 at March 31, 2020.

TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently in Florida.

We expect this expansion to continue and contribute to our future growth.

In February 2020, HCPCI entered into a policy replacement agreement with Anchor Property & Casualty Insurance Company (“Anchor”).

Under the agreement, HCPCI offered short-term replacement policies for all policies cancelled by Anchor as of April 1, 2020.

The replacement policies have substantially the same terms and rates as the cancelled polices and will expire on the same dates the cancelled policies would have expired had they not been cancelled.

Upon expiration of the replacement policies, HCPCI will offer renewals to those policyholders at its own rates and terms.

In connection with the agreement, we had received $30,000,000 of advanced premiums from Anchor on March 31, 2020.

The replacement policies had substantially the same terms and rates as the cancelled polices and will expire on the same dates the cancelled policies would have expired had they not been cancelled.

Upon expiration of the replacement policies, HCPCI may offer renewals to those policyholders at its own rates and terms but has no obligation to do so.

In connection with the agreement, we received $30,000,000 on February 13, 2020 representing an estimate of unearned premium on policies to be replaced.

TypTap has been the primary source of our organic growth in gross written premium since 2018.

TypTap’s policies in force have increased from 6,721 in January 2018 to 31,715 at June 30, 2020.

TypTap has been successful in using internally developed proprietary technology to underwrite, select and write policies efficiently in Florida.

In addition to the expansion in TypTap business, we expect the Anchor transaction will contribute to our future growth.

We have a Bermuda domiciled wholly-owned reinsurance subsidiary, Claddaugh Casualty Insurance Company Ltd.

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Our real estate operations consist of properties we own and use for our own operations and multiple properties we own and operate for investment purposes.

Properties used in operations consist of our Tampa headquarters building and a secondary insurance operations site in Ocala, Florida.

Properties used in operations consist of two Tampa office buildings and a secondary insurance operations site in Ocala, Florida.

Our investment properties include one full-service restaurant, retail shopping centers, one office building, two marinas, and undeveloped land near our headquarters in Tampa, Florida.

Other Operations

Other Oper ations

Information Technology

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The severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, the containment measures, the extent and severity of the impact on our patrons and business partners, and the size and effectiveness of the state and federal government’s relief programs, of which we expect more to follow.

With the use of our existing technologies and infrastructure, a majority of our workforce can stay at home and continue working without significant disruptions to our operations.

With the use of our existing technologies and infrastructure, a majority of our workforce can work from home without significant disruptions to our operations.

At present, we have no plan to reduce our workforce.

At March 31, 2020, the impact on our financial statements of COVOD-19 consists primarily of significant unrealized losses on our portfolio of investment securities and material losses from limited partnership investments.

At June 30, 2020, the impact on our financial statements of COVOD-19 consists primarily of unrealized losses on our portfolio of investment securities and material losses from limited partnership investments.

However, we may experience further material economic impacts in other areas of our business, such as in our real estate operations, in future periods.

Recent Events

On April 1, 2020, Gulf to Bay LM, LLC, our wholly owned real estate subsidiary, sued Kroger Co.

in federal district court to enforce a guaranty of a commercial lease executed between Gulf to Bay LM, LLC and Lucky’s Market Operating Company, LLC.

Lucky has filed for bankruptcy earlier this year.

On April 2, 2020, we entered into a purchase and sale agreement with Tampa-Coconut Palms Office Building Exchange, LLC to acquire an office building in Tampa, Florida for a purchase price of $4,000,000.

The transaction is expected to be finalized in late May 2020.

On April 9, 2020, we decided to offer our investment property in Riverview, Florida for sale.

On April 13, 2020, our Board of Directors declared a quarterly dividend of $0.40 per common share.

The dividends are payable on June 19, 2020 to stockholders of record on May 15, 2020.

On July 2, 2020, our Board of Directors declared a quarterly dividend of $0.40 per common share.

The dividends are payable on September 18, 2020 to stockholders of record on August 21, 2020.

On July 24, 2020, the Florida Department of Transportation (“FDOT”) exercised the power of eminent domain under the Florida Constitution in order to acquire for a highway expansion project the property in Tampa, Florida where our headquarters is located for compensation of $47,500,000.

Under the terms of the agreement, the FDOT assumed all contracts associated with this property, including the leases with existing tenants.

In addition, we agreed to donate a small portion of a separate tract of nearby undeveloped land we own to the FDOT for the same expansion project.

We will have no later than July 24, 2023 to vacate the property.

In connection with this transaction, we recognized a net gain from involuntary conversion of approximately $37,000,000.

On July 29, 2020, we made an early repayment of our 4% Promissory note, which was collateralized by our Tampa, Florida headquarters.

RESULTS OF OPERATIONS

The following table summarizes our results of operations for the three months ended March 31, 2020 and 2019 (dollar amounts in thousands, except per share amounts):

The following table summarizes our results of operations for the three and six months ended June 30, 2020 and 2019 (dollar amounts in thousands, except per share amounts):

Three Months Ended

Six Months Ended

Operating Revenue

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Net premiums earned

Net investment (loss) income

Net realized investment losses

Net unrealized investment (losses) gains

Net investment income

Net realized investment gains (losses)

Net unrealized investment gains (losses)

Credit losses on investments

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Interest expense

Loss on repurchase of convertible senior notes

Other operating expenses

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Earnings Per Share Data:

Comparison of the Three Months ended March 31, 2020 to the Three Months ended March 31, 2019

Our results of operations for the three months ended March 31, 2020 reflect income available to common stockholders of approximately $547,000, or $0.07 earnings per diluted common share, compared with approximately $6,738,000, or $0.82 earnings per diluted common share, for the three months ended March 31, 2019.

The quarter-over-quarter decrease in pre-tax income was primarily due to a net decrease in income from our investment portfolio (consisting of net investment income/loss and net realized and unrealized gains/losses) of $15,440,000, an increase in policy acquisition and underwriting expenses of $2,153,000, an increase in losses and loss adjustment expenses of $1,082,000, and increased payroll costs of $1,003,000, offset by an increase in net premiums earned of $10,462,000 and a $1,367,000 decrease in interest expense.

Gross Premiums Earned for the three months ended March 31, 2020 and 2019 were approximately $92,365,000 and $82,597,000, respectively.

The quarter-over-quarter increase was primarily attributable to increased policies in force from TypTap business.

Premiums Ceded for the three months ended March 31, 2020 and 2019 were approximately $30,719,000 and $31,413,000, respectively, representing 33.3% and 38.0%, respectively, of gross premiums earned.

The $694,000 decrease was primarily attributable to a reduction in premiums ceded attributable to retrospective provisions under one reinsurance contract, offset by an increase in premiums ceded attributable to a lower retention level effective June 1, 2019.

Comparison of the Three Months ended June 30 , 2020 to the Three Months ended June 30 , 2019

Our results of operations for the three months ended June 30, 2020 reflect income available to common stockholders of approximately $8,936,000 or $1.08 earnings per diluted common share, compared with approximately $7,553,000, or $0.90 earnings per diluted common share, for the three months ended June 30, 2019.

The quarter-over-quarter increase in pre-tax income was primarily due to a net increase in net premiums earned of $21,451,000, an increase in income from our investment portfolio (consisting of net investment income/loss and net realized and unrealized gains/losses) of $504,000, offset by an increase in policy acquisition and underwriting expenses of $2,914,000, an increase in losses and loss adjustment expenses of $15,550,000, and increased payroll costs of $1,733,000.

Gross Premiums Earned for the three months ended June 30, 2020 and 2019 were approximately $107,803,000 and $83,315,000, respectively.

The quarter-over-quarter increase was primarily attributable to the policies transitioned from Anchor and increased policies in force from the growth in TypTap’s business.

Gross premiums earned related to the Anchor policies were approximately $14,220,000 for the quarter.

Premiums Ceded for the three months ended June 30, 2020 and 2019 were approximately $34,354,000 and $31,317,000, respectively, representing 31.9% and 37.6%, respectively, of gross premiums earned.

The $3,037,000 increase was primarily attributable to increased reinsurance costs effective June 1, 2020 and a higher level of reinsurance coverage, offset by a reduction in premiums ceded attributable to retrospective provisions under one reinsurance contract.

Our premiums ceded represent costs of reinsurance to cover losses from catastrophes that exceed the retention levels defined by our catastrophe excess of loss reinsurance contracts or to assume a proportional share of losses as defined in a quota share agreement.

The rates we pay for reinsurance are based primarily on policy exposures reflected in gross premiums earned.

For the three months ended March 31, 2020, premiums ceded included a decrease of approximately $2,520,000 related to retrospective provisions compared with a net reduction of approximately $512,000 for the three months ended March 31, 2019.

For the three months ended June 30, 2020, premiums ceded included a decrease of approximately $3,240,000 related to retrospective provisions compared with a net reduction of approximately $1,226,000 for the three months ended June 30, 2019.

See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the three months ended March 31, 2020 and 2019 totaled approximately $45,799,000 and $36,197,000, respectively.

Net Premiums Written for the three months ended June 30, 2020 and 2019 totaled approximately $137,527,000 and $102,124,000, respectively.

Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable reinsurance costs.

The increase in 2020 resulted from an increase in gross premiums written from the growth of TypTap business.

We had approximately 133,000 policies in force at March 31, 2020 as compared with approximately 125,000 policies in force at March 31, 2019.

Net Premiums Earned for the three months ended March 31, 2020 and 2019 were approximately $61,646,000 and $51,184,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months ended March 31, 2020 and 2019 (amounts in thousands):

The increase in 2020 resulted from an increase in gross premiums written from the growth of TypTap business and the transition of policies from Anchor.

We had approximately 164,000 policies in force at June 30, 2020 as compared with approximately 124,000 policies in force at June 30, 2019.

Net Premiums Earned for the three months ended June 30, 2020 and 2019 were approximately $73,449,000 and $51,998,000, respectively, and reflect the gross premiums earned less reinsurance costs as described above.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the three months ended June 30, 2020 and 2019 (amounts in thousands):

Three Months Ended

Net Premiums Written

Decrease in Unearned Premiums

Increase in Unearned Premiums

Net Premiums Earned

Net Investment Loss for the three months ended March 31, 2020 was approximately $192,000 compared with approximately $3,278,000 of net investment income for the three months ended March 31, 2019.

The $3,470,000 decrease was primarily attributable to $2,935,000 of loss from limited partnership investments during the first quarter of 2020.

Net Realized Investment Losses for the three months ended March 31, 2020 and 2019 were approximately $2,244,000 and $372,000, respectively.

The losses in 2020 resulted primarily from sales intended to rebalance our investment portfolio.

Net Unrealized Investment Losses for the three months ended March 31, 2020 were approximately $4,805,000 versus approximately $5,293,000 of net unrealized investment gains for the three months ended

March 31, 2019 , reflecting a n adverse change in the fair value of equity securities resulting from the fear of economic recession caused by COVID-19 .

Our Losses and Loss Adjustment Expenses amounted to approximately $28,078,000 and $26,996,000 for the three months ended March 31, 2020 and 2019, respectively.

The $1,082,000 increase primarily resulted from an increase in loss reserves related to the growth of TypTap premiums, offset by lower loss reserves related to a severe storm event in March 2019.

Net Investment Income for the three months ended June 30 , 2020 and 2019 was approximately $ 1,604,000 and $ 4,226 ,000 , respectively .

The $ 2,622,000 decrease was primarily attributable to lower income from limited partnership investments and cash equivalent instruments .

Net Realized Investment Gains for the three months ended June 30, 2020 were approximately $1,435,000 versus approximately $133,000 of net realized investment loss for the three months ended June 30, 2019.

The gains in 2020 resulted primarily from sales intended to rebalance our investment portfolio and manage overall portfolio risk.

Net Unrealized Investment gains for the three months ended June 30, 2020 and 2019 were approximately $2,884,000 and $1,326,000, respectively, reflecting an increase in the fair value of equity securities resulting from an improved economic outlook since the shock caused by COVID-19.

Our Losses and Loss Adjustment Expenses amounted to approximately $39,843,000 and $24,293,000 for the three months ended June 30, 2020 and 2019, respectively.

The $15,550,000 increase primarily resulted from the increase in gross premiums earned, change in premium mix and reserves for weather-related losses in the quarter, offset by a reduction in loss reserves related to 2019 loss year.

See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the three months ended March 31, 2020 and 2019 were approximately $11,826,000 and $9,673,000, respectively, and primarily reflect the amortization of deferred acquisition costs such as commissions payable to agents for production and renewal of policies, and premium taxes.

Policy Acquisition and Other Underwriting Expenses for the three months ended June 30, 2020 and 2019 were approximately $12,991,000 and $10,077,000, respectively, and primarily reflect the amortization of deferred acquisition costs such as commissions payable to agents for production and renewal of policies, and premium taxes.

The $2,914,000 increase was primarily attributable to higher agent commission rates and property inspection costs associated with the organic growth of TypTap business.

General and Administrative Personnel Expenses for the three months ended March 31, 2020 and 2019 were approximately $8,367,000 and $7,364,000, respectively.

General and Administrative Personnel Expenses for the three months ended June 30, 2020 and 2019 were approximately $9,731,000 and $7,998,000, respectively.

Our general and administrative personnel expenses include salaries, wages, payroll taxes, share-based compensation expenses, and employee benefit costs.

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In addition, our personnel expenses are decreased by the capitalization of payroll costs related to a project to develop software for internal use and the payroll costs associated with the processing and settlement of certain catastrophe claims which are recoverable from reinsurers under reinsurance contracts.

The period-over-period increase of $1,003,000 was primarily attributable to higher share-based compensation expense, an increase in the headcount of temporary and full-time employees, and merit increases for non-executive employees effective in late February 2020, and lower capitalized and recoverable payroll costs.

Interest Expense for the three months ended March 31, 2020 and 2019 was approximately $2,970,000 and $4,337,000, respectively.

The decrease resulted from the repayment of our 3.875% Convertible Senior Notes in March 2019.

Income Tax Expense for the three months ended March 31, 2020 and 2019 was approximately $110,000 and $2,545,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 16.7% for 2020 and 27.4% for 2019.

The decrease in the effective tax rate was primarily due to windfall tax benefits on share-based awards recognized during the first quarter of 2020.

The loss ratio applicable to the three months ended March 31, 2020 (losses and loss adjustment expenses incurred related to net premiums earned) was 45.6% compared with 52.7% for the three months ended March 31, 2019.

The decrease was primarily due to an increase in net premiums earned.

The expense ratio applicable to the three months ended March 31, 2020 (defined as underwriting expenses, general and administrative personnel expenses, interest and other operating expenses related to net premiums earned) was 43.2% compared with 47.6% for the three months ended March 31, 2019.

The decrease in our expense ratio was primarily attributable to the increase in net premiums earned and the decrease in interest expense, offset by the increase in losses and loss adjustment expenses and the increase in policy acquisition, underwriting and personnel expenses.

The period-over-period increase of $1,733,000 was primarily attributable to higher share-based compensation expense and employee incentive bonus, an increase in the headcount of temporary and full-time employees, and merit increases for non-executive employees effective in late February 2020, and lower capitalized and recoverable payroll costs.

Income Tax Expense for the three months ended June 30, 2020 and 2019 was approximately $2,887,000 and $2,762,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 24.4% for 2020 and 26.8% for 2019.

The decrease in the effective tax rate was primarily due to the recognition of 2018 Florida income tax refund and the reduced Florida corporate income tax rate effective in September 2019.

The loss ratio applicable to the three months ended June 30, 2020 (losses and loss adjustment expenses incurred related to net premiums earned) was 54.2% compared with 46.7% for the three months ended June 30, 2019.

The increase was primarily due to the increase in losses and loss adjustment expenses, offset in part by the increase in net premiums earned.

The expense ratio applicable to the three months ended June 30, 2020 (defined as underwriting expenses, general and administrative personnel expenses , interest and other operating expenses related to net premiums earned) was 39.6 % compared with 4 6 .

2 % for the three months ended June 30, 2019 .

The de crease in our expense ratio was primarily attributable to the increase in net premiums earned, offset by the increase in losses and loss adjustment expense s and the increase in policy acquisition, underwriting and personnel expenses .

The combined ratio (total of all expenses in relation to net premiums earned) is the measure of overall underwriting profitability before other income.

Our combined ratio for the three months ended March 31, 2020 was 88 .

8 % compared with 100.3 % for the three months ended March 31, 2019 .

The de crease was primarily attributable to the increase in net premiums earned .

Our combined ratio for the three months ended June 30, 2020 was 93.8% compared with 92.9% for the three months ended June 30, 2019.

Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined ratio measured to gross premiums earned is more relevant in assessing overall performance.

The combined ratio to gross premiums earned for the three months ended March 31, 2020 was 59.3% compared with 62.2% for the three months ended March 31, 2019.

The decrease in 2020 was attributable to the factors described above.

The combined ratio to gross premiums earned for the three months ended June 30, 2020 was 63.9% compared with 58.0% for the three months ended June 30, 2019.

The increase in 2020 was attributable to the factors described above.

Comparison of the Six Months ended June 30, 2020 to the Six Months ended June 30, 2019

Our results of operations for the six months ended June 30, 2020 reflect income available to common stockholders of approximately $9,483,000, or $1.23 earnings per diluted common share, compared with approximately $14,291,000, or $1.72 earnings per diluted common share, for the six months ended June 30, 2019.

The period-over-period decrease was primarily due to a net decrease in income from our investment portfolio of $14,936,000, an increase in losses and loss adjustment expenses of $16,632,000, an increase in policy acquisition and other underwriting expense of $5,067,000, and an increase in general and administrative personnel expenses of $2,736,000, offset by an increase net premiums earned of $31,913,000, which contributed to a decrease in pre-tax income of $7,118,000.

Gross Premiums Earned for the six months ended June 30, 2020 and 2019 were approximately $200,168,000 and $165,912,000, respectively.

The $34,256,000 increase in 2020 compared with the corresponding period in 2019 was primarily attributable to a net increase in policies in force as described earlier.

Premiums Ceded for the six months ended June 30, 2020 and 2019 were approximately $65,073,000 and $62,730,000, respectively, representing 32.5% and 37.8%, respectively, of gross premiums earned.

The $2,343,000 increase was primarily attributable to increased reinsurance cost per coverage limit effective June 1, 2020 and a higher level of reinsurance coverage, offset by a reduction in premiums ceded attributable to retrospective provisions under one reinsurance contract.

For the six months ended June 30, 2020, premiums ceded included a reduction of approximately $5,760,000 related to retrospective provisions.

For the six months ended June 30, 2019, premiums ceded included a net reduction of approximately $1,738,000 related to retrospective provisions.

See “Economic Impact of Reinsurance Contracts with Retrospective Provisions” under “Critical Accounting Policies and Estimates.”

Net Premiums Written for the six months ended June 30, 2020 and 2019 totaled approximately $183,326,000 and $138,321,000, respectively.

The $45,005,000 increase in 2020 resulted primarily from the factors described earlier.

Net Premiums Earned for the six months ended June 30, 20 20 and 201 9 were approximately $ 135,095,000 and $10 3 , 182 ,000, respectively, and reflect gross premiums earned less reinsurance costs as described above.

The following is a reconciliation of our total Net Premiums Written to Net Premiums Earned for the six months ended June 30, 2020 and 2019 (amounts in thousands):

Six Months Ended

Net Premiums Written

Increase in Unearned Premiums

Net Premiums Earned

Net Investment Income for the six months ended June 30, 2020 and 2019 was approximately $1,412,000 and $7,504,000, respectively.

The $6,092,000 decrease was primarily attributable to a loss of $2,747,000 from limited partnership investments in 2020 as opposed to income of $832,000 in 2019.

In addition, interest income from cash, cash equivalents, and short-term investments was lower by $1,627,000 in 2020 compared with 2019 due to a lowering of investment yields, particularly on cash.

Net Unrealized Investment Losses for the six months ended June 30, 2020 were approximately $1,921,000 versus net unrealized investment gains of approximately $6,619,000 for the six months ended June 30, 2019, reflecting a deterioration in the fair value of equity securities caused by COVID-19 pandemic.

Our Losses and Loss Adjustment Expenses amounted to approximately $67,921,000 and $51,289,000 for the six months ended June 30, 2020 and 2019, respectively.

The $16,632,000 increase was primarily attributable to the increase in gross premiums earned, change in premium mix and reserves for weather-related losses, offset by lower prior year development.

See “Reserves for Losses and Loss Adjustment Expenses” under “Critical Accounting Policies and Estimates.”

Policy Acquisition and Other Underwriting Expenses for the six months ended June 30, 2020 and 2019 were approximately $24,817,000 and $19,750,000, respectively.

The $5,067,000 increase was primarily attributable to the factors described earlier.

General and Administrative Personnel Expenses for the six months ended June 30, 2020 and 2019 were approximately $18,098,000 and $15,362,000, respectively.

The period-over-period increase of $2,736,000 was primarily attributable to higher share-based compensation expense and merit increases for non-executive employees, and lower capitalized and recoverable payroll costs.

Interest Expense for the six months ended June 30, 2020 and 2019 was approximately $5,990,000 and $7,221,000, respectively.

The decrease resulted from the repayment of our 3.875% Convertible Senior Notes in March 2019.

Income Tax Expense for the six months ended June 30, 2020 and 2019 was approximately $2,997,000 and $5,307,000, respectively, for state, federal, and foreign income taxes resulting in an effective tax rate of 24.0% for 2020 and 27.1% for 2019.

The decrease was primarily attributable to the recognition of windfall tax benefits related to share-based awards in addition to the factors described previously.

The loss ratio applicable to the six months ended June 30, 2020 was 50.3% compared with 49.7% for the six months ended June 30, 2019.

The expense ratio applicable to the six months ended June 30, 2020 was 41.2% compared with 46.9% for the six months ended June 30, 2019.

The decrease in our expense ratio was primarily attributable to the increase in net premiums earned.

The combined ratio is the measure of overall underwriting profitability before other income.

Our combined ratio for the six months ended June 30, 2020 was 91.5% compared with 96.6% for the six months ended June 30, 2019.

The decrease was attributable to the increase in net premiums earned, offset in part by the increase in losses and loss adjustment expenses as described above.

The combined ratio to gross premiums earned for the six months ended June 30, 2020 was 61.8% compared with 60.1% for the six months ended June 30, 2018.

The increase in 2020 was primarily attributable to the increase in losses and loss adjustment expenses, offset by the increase in gross premiums earned.

Seasonality of Our Business

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Throughout our history, our liquidity requirements have been met through issuances of our common and preferred stock, debt offerings and funds from operations.

We expect our future liquidity requirements will be met by funds from operations, primarily the cash received by insurance subsidiaries from premiums written and investment income.

We expect our future liquidity requirements will be met by funds from operations, primarily the cash received by our insurance subsidiaries from premiums written and investment income.

We may consider raising additional capital through debt and equity offerings to support our growth and future investment opportunities.

Our insurance subsidiary requires liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and to fund operating expenses.

Our insurance subsidiaries require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and to fund operating expenses.

In addition, we attempt to maintain adequate levels of liquidity and surplus to manage any differences between the duration of our liabilities and invested assets.

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In the future, we anticipate our primary use of funds will be to pay claims, reinsurance premiums, interest, and dividends and to fund operating expenses and real estate acquisitions .

Revolving Credit Facility, Senior Notes, Promissory Notes , and Finance Lea ses

The following table summarizes the principal and interest payment obligations of our indebtedness at March 31, 2020:

Revolving Credit Facility, Senior Notes, Promissory Notes, and Finance Leases

The following table summarizes the principal and interest payment obligations of our indebtedness at June 30, 2020:

Maturity Date

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Share Repurchase Plan

In December 2019, our Board of Directors extended the expiry date of our 2019 share repurchase plan to March 15, 2020.

On March 13, 2020, the Board approved a plan for 2020, effective March 16, 2020, to repurchase up to $20,000,000 of common shares under which we may purchase shares of common stock in open market purchases, block transactions and privately negotiated transactions in accordance with applicable federal securities laws.

See Note 17 -- “Stockholders’ Equity” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q.

See Note 19 -- “Stockholders’ Equity” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for more information.

Limited Partnership Investments

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Three of these funds have unexpired capital commitments which are callable at the discretion of the fund’s general partner for funding new investments or expenses of the fund.

Although capital commitments for the remaining two funds have expired, the general partners may request additional funds under certain circumstances.

At March 31, 2020, there was an aggregate unfunded capital balance of $14,211,000.

Although capital commitments for the remaining three funds have expired, the general partners may request additional funds under certain circumstances.

At June 30, 2020, there was an aggregate unfunded capital balance of $13,660,000.

See Limited Partnership Investments under Note 5 -- “Investments” to our unaudited consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for additional information.

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Thus, we may consider increasing our real estate investment portfolio should an opportunity arise.

For instance, we purchased an office building in Tampa, Florida in April 2020.

We currently have a 90% equity interest in FMKT Mel JV, LLC, a Florida limited liability company for which we are not the primary beneficiary.

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Sources and Uses of Cash

Cash Flows for the Three Months Ended March 31, 2020

Net cash provided by operating activities for the three months ended March 31, 2020 was approximately $55,403,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $14,884,000) and $30,000,000 of advanced premiums from Anchor less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Cash Flows for the Six Months Ended June 30, 2020

Net cash provided by operating activities for the six months ended June 30, 2020 was approximately $109,988,000, which consisted primarily of cash received from net premiums written, reinsurance recoveries (of approximately $32,597,000) and $28,745,000 of net cash receipts from Anchor less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Due to the inclusion of the cash receipt from Anchor, net cash provided by operating activities was higher than usual.

Net cash provided by investing activities of $23,923,000 was primarily due to the proceeds from redemptions and maturities of fixed-maturity securities of $27,914,000, and the proceeds from sales of fixed-maturity and equity securities of $13,056,000, offset by the purchases of fixed-maturity and equity securities of $13,637,000, the purchase of real estate investments of $2,452,000, limited partnership investments of $919,000, and the purchases of property and equipment of $353,000.

Net cash provided by financing activities totaled $8,585,000, which was primarily due to $14,000,000 of borrowings from our revolving credit facility and the proceeds from issuance of a 3.90% promissory note of $10,000,000, offset by repayments of long-term debt of $9,160,000, and $3,095,000 of net cash dividend payments.

Cash Flows for the Three Months Ended March 31, 2019

Net cash provided by operating activities for the three months ended March 31, 2019 was approximately $10,595,000, which consisted primarily of cash received from net premiums written as well as reinsurance recoveries (of approximately $18,270,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Net cash provided by investing activities of $85,995,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $90,641,000, and the proceeds from redemptions and maturities of fixed-maturity securities of $52,594,000, offset by the purchases of fixed-maturity and equity securities of $48,673,000, the purchase of real estate investments of $2,522,000, limited partnership investments of $1,470,000, and the purchases of property and equipment of $5,349,000.

Net cash used in financing activities totaled $2,686,000, which consisted of $9,496,000 used to repay a 3.95% promissory note, $6,162,000 of net cash dividend payments, $4,459,000 used to repurchase our 4.25% convertible senior notes, and $6,467,000 used in our share repurchases, offset by the proceeds from issuance of a 3.90% promissory note of $10,000,000 and draws from our revolving credit facility of $14,000,000.

Cash Flows for the Six Months Ended June 30, 2019

Net cash provided by operating activities for the six months ended June 30, 2019 was approximately $28,834,000, which consisted primarily of cash received from net premiums written as well as reinsurance recoveries (of approximately $45,832,000) less cash disbursed for operating expenses, losses and loss adjustment expenses and interest payments.

Net cash provided by investing activities of $45,836,000 was primarily due to the proceeds from sales of fixed-maturity and equity securities of $35,826,000, the proceeds from redemptions and maturities of fixed-maturity securities of $47,788,000, and the proceeds from sales and maturities of short-term and other investments of $69,897,000, offset by the purchases of fixed-maturity and equity securities of $91,505,000, the purchase of real estate investments of $9,892,000, and limited partnership investments of $1,751,000.

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Our excess cash is invested primarily in money market accounts, certificates of deposit, and fixed-maturity and equity securities.

At March 31, 2020, we had $209,976,000 of fixed-maturity and equity investments, which are carried at fair value.

At June 30, 2020, we had $139,302,000 of fixed-maturity and equity investments, which are carried at fair value.

Changes in the general interest rate environment affect the returns available on new fixed-maturity investments.

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A decline in interest rates reduces the returns available on new fixed-maturity investments but increases the market value of existing fixed-maturity investments, creating the opportunity for realized investment gains on disposition.

To maximize the gains from fixed-maturity investments in a low interest rate environment, we have decreased our holdings in fixed-maturity securities since the beginning of 2020.

In the future, we may alter our investment policy as to investments in federal, state and municipal obligations, preferred and common equity securities and real estate mortgages, as permitted by applicable law, including insurance regulations.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2020, we had unexpired capital commitments for limited partnerships in which we hold interests.

As of June 30, 2020, we had unexpired capital commitments for limited partnerships in which we hold interests.

Such commitments are not recognized in the financial statements but are required to be disclosed in the notes to the financial statements.

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CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes our material contractual obligations and commitments as of March 31, 2020 (amounts in thousands):

The following table summarizes our material contractual obligations and commitments as of June 30, 2020 (amounts in thousands):

Payment Due by Period

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Service agreement (1)

Reinsurance contracts (2)

Unfunded capital commitments (2)

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Liabilities related to our India operations were converted from Indian Rupees to U.S.

dollars using the March 31, 2020 exchange rate.

Represents the minimum payment of reinsurance premiums under one multi-year reinsurance contract.

dollars using the June 30, 2020 exchange rate.

Represents the unfunded balance of capital commitments under the subscription agreements related to limited partnerships in which we hold interests.

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Estimating the IBNR component of our Reserves involves considerable judgment on the part of management.

At March 31, 2020, $165,651,000 of the total $207,108,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR.

At June 30, 2020 , $ 166,238,000 of the total $ 211,162,000 we have reserved for losses and loss adjustment expenses is attributable to our estimate of IBNR.

The remaining $ 44,924,000 relates to known cases which have been reported but not yet fully settled in which case we have established a reserve based on currently available information and our best estimate of the cost to settle each claim.

At March 31, 2020, $36,564,000 of the $41,457,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves decreased from $214,697,000 at December 31, 2019 to $207,108,000 at March 31, 2020.

At June 30, 2020 , $ 32,393,000 of the $ 44,924,000 in reserves for known cases relates to claims incurred during prior years.

Our Reserves decreased from $214,697,000 at December 31, 2019 to $211,162,000 at June 30, 2020.

The $3,535,000 decrease is comprised of reductions in our Reserves of $28,490,000 specific to Hurricane Irma in 2017 and Hurricane Michael in 2018 and reductions in our non-catastrophe Reserves of $14,324,000 for 2019 and $11,203,000 for 2018 and prior loss years, offset by $50,483,000 in reserves established for 2020 loss year.

The $21,320,000 in Reserves established for 2020 claims is primarily driven by an allowance for those claims that have been incurred but not reported to the company as of March 31, 2020.

The $50,482,000 in Reserves established for 2020 claims is primarily driven by an allowance for those claims that have been incurred but not reported to the company as of June 30, 2020.

The decrease of $54,017,000 specific to our 2019 and prior loss-year reserves is due to settlement of claims related to those loss years.

Based on all information known to us, we consider our Reserves at March 31, 2020 to be adequate to cover our claims for losses that have occurred as of that date including losses yet to be reported to us.

Based on all information known to us, we consider our Reserves at June 30, 2020 to be adequate to cover our claims for losses that have occurred as of that date including losses yet to be reported to us.

However, these estimates are continually reviewed by management as they are subject to significant variability and may be impacted by trends in claim severity and frequency or unusual exposures that have not yet been identified.

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Such adjustments to the asset, which accrue throughout the contract term, will negatively impact our operating results when a catastrophic loss event occurs during the contract term.

For the three months ended March 31, 2020 and 2019 , we accrued benefits of $ 2,520,000 and $27 8 ,000, respectively .

For the three months ended March 31, 2020 , there was no adjustment in ceded premiums whereas we recognized a reduction in premiums ceded of $ 234 ,000 for the three months ended March 31 , 2019 .

In combination, for the three months ended March 31, 2020 and 2019 , we recognized decrease s i n ceded premiums of $ 2,520,000 a nd $ 512 ,000, respectiv ely .

As of March 31, 2020 , we had $ 12,000,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limit provided under such agreement.

A s of December 31, 2019 , we had $ 9 ,480,000 of accrued benefits related to th is agreement.

We believe the credit risk associated with the collectability of these accrued benefits is minimal based on available information about the reinsurer’s financial position.

For the three months ended June 30, 2020 and 2019, we accrued benefits of $3,240,000 and $1,026,000, respectively.

For the three months ended June 30, 2020, there was no adjustment in ceded premiums whereas we recognized a reduction in premiums ceded of $200,000 for the three months ended June 30, 2019.

In combination, for the three months ended June 30, 2020 and 2019, we recognized decreases in ceded premiums of $3,240,000 and $1,226,000, respectively.

For the six months ended June 30, 2020 and 2019, we accrued benefits of $5,760,000 and $1,304,000, respectively.

There was no adjustment in ceded premiums for the six months ended June 30, 2020.

For the six months ended June 30, 2019, we recognized a decrease in premiums ceded of $434,000.

In combination, for the six months ended June 30, 2020 and 2019, we recognized decreases in ceded premiums of $5,760,000 and $1,738,000, respectively.

As of June 30, 2020, we had $1,560,000 of accrued benefits, the amount that would be charged to earnings in the event we experience a catastrophic loss that exceeds the coverage limit provided under such agreement.

In June 2020, we received a $13,680,000 premium refund under the retrospective reinsurance contract that ended May 31, 2020.

Accrued benefits related to this expired contract w ere $9,480,000 at December 31, 2019.

We believe the credit risk associated with the collectability of these accrued benefits is minimal based on available information about the reinsurer’s financial position and the reinsurer’s demonstrated ability to comply with contract terms .

The above and other accounting estimates and their related risks that we consider to be our critical accounting estimates are more fully described in our Annual Report on Form 10-K, which we filed with the SEC on March 6, 2020.

For the three months ended March 31, 2020, there have been no material changes with respect to any of our critical accounting policies.

For the six months ended June 30, 2020, there have been no material changes with respect to any of our critical accounting policies.

RECENT ACCOUNTING PRONOUNCEMENTS

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 3 to our Notes to Unaudited Consolidated Financial Statements.

ITEM 3 – QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK

Our investment portfolios at March 31, 2020 included fixed-maturity and equity securities, the purposes of which are not for speculation.

Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet our obligations while minimizing market risk, which is the potential economic loss from adverse fluctuations in securities prices.

We consider many factors including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies.

Our investment securities are managed primarily by outside investment advisors and are overseen by the investment committee appointed by our board of directors.

From time to time, our investment committee may decide to invest in low risk assets such as U.S.

government bonds.

Our investment portfolios are exposed to interest rate risk, credit risk and equity price risk.

Fiscal and economic uncertainties caused by any government action or inaction may exacerbate these risks and potentially have adverse impacts on the value of our investment portfolios.

We classify our fixed-maturity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity.

As such, any material temporary changes in their fair value can adversely impact the carrying value of our stockholders’ equity.

In addition, we recognize any unrealized gains or losses related to our equity securities in our statement of income.

As a result, our results of operations can be materially affected by the volatility in the equity market.

Interest Rate Risk

Our fixed-maturity securities are sensitive to potential losses resulting from unfavorable changes in interest rates.

We manage the risk by analyzing anticipated movement in interest rates and considering our future capital needs.

The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities at March 31, 2020 (amounts in thousands):

Hypothetical Change in Interest Rates

300 basis point increase

200 basis point increase

100 basis point increase

100 basis point decrease

200 basis point decrease

300 basis point decrease

Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuers of our fixed-maturity securities.

We mitigate the risk by investing in fixed-maturity securities that are generally investment grade, by diversifying our investment portfolio to avoid concentrations in any single issuer or business sector, and by continually monitoring each individual security for declines in credit quality.

While we emphasize credit quality in our investment selection process, significant downturns in the markets or general economy may impact the credit quality of our portfolio.

The following table presents the composition of our fixed-maturity securities, by rating, at March 31, 2020 (amounts in thousands):

Comparable Rating

BBB+, BBB, BBB-

CCC+, CC and Not rated

Equity Price Risk

Our equity investment portfolio at March 31, 2020 included common stocks, perpetual preferred stocks, mutual funds and exchange traded funds.

We may incur losses due to adverse changes in equity security prices.

We manage the risk primarily through industry and issuer diversification and asset mix.

The following table illustrates the composition of our equity securities at March 31, 2020 (amounts in thousands):

Stocks by sector:

Mutual funds and exchange traded funds by type:

Represents an aggregate of less than 5% sectors.

Foreign Currency Exchange Risk

At March 31, 2020, we did not have any material exposure to foreign currency related risk.

ITEM 4 – CONTROL S AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial and accounting officer), we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, and, based on this evaluation, our chief executive officer and our chief financial officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

In addition, implementation of possible controls and procedures depends on management’s judgment in evaluating their benefits relative to costs.

PART II – OTHE R INFORMATION

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis